By April 2002 Japanese Prime Minister Junichiro Koizumi had spent one year in office. Already, however, he had encountered opposition by conservative factions within his Liberal Democratic Party (LDP). They were led by party bosses entrenched in the postal service, construction and retail trade, and rice farming. As Koizumi wryly admitted, his popular victory may have been a product of the nation’s penchant for mass political fads. His campaign had stressed the need for economic reform, including deregulation and privatization. Over the year, reality had set in.

Japan’s economy, the second largest in the world, remained enmeshed in its fourth recession in a decade. A government report noted that property values had declined 5.9% in 2001, the sharpest fall in nine years. In October 2002 the Nikkei 225 stock index fell to 8,439, its lowest level since June 1983. Two days before the anniversary of Koizumi’s election, an Asahi shimbun poll revealed that 72% of its respondents believed that there had been “little or no improvement” in the economy.

Meanwhile, the prime minister had felt the force of opposition within his cabinet. On January 29 he dismissed Makiko Tanaka, the first woman to have served as Japan’s foreign minister. He felt that she had been too vigorous in attacking conservative leaders in the Foreign Ministry. Koizumi was unable to recruit Sadako Ogata, another woman, who had become well known as UN High Commissioner for Refugees, and on February 1 appointed Yoriko Kawaguchi to be foreign minister. She had previously served as environment minister.

On April 16 the cabinet adopted measures designed to assign a role for the military in domestic defense. The step was a reaction to the attacks on Sept. 11, 2001, in the U.S. Tokyo would instruct local governments to control airports and harbours the moment a threat was detected. Under Japan’s constitution the Self Defense Forces continued to be barred from taking offensive military actions abroad.

One remarkable domestic development was the spread of Web-capable phones. In late April the number of cell phones equipped for e-mail totaled 50 million (in the hands of about 40% of the population). Nippon Telegraph & Telephone, formerly a state monopoly, operated NTT DoCoMo, which controlled 60% of the cellular market. Nonetheless, by May sales of Web phones had plunged because of sheer saturation, falling 28% lower than the level of sales in the same month of 2001.

On August 5 the government unveiled a plan for a national computer registry of all citizens. It would record basic data—name, address, sex, and birthdate—but would not place this information on the Internet. Yokohama, the nation’s second largest municipality, and six other cities opted out of the registry, leaving four million residents outside the system. A bill protecting personal information died in the Diet (parliament) as legislators went on summer vacation.

The Economy

In March the government reported that in the fourth quarter of 2001, the economy had contracted sharply (by 1.2%), the third consecutive losing quarter. For the year it was down 0.5%, and unemployment was near a postwar high. Public debt reached a level of 130% of gross domestic product, the highest among the seven major industrial nations. In an interview the prime minister admitted he did not know why the economy had shown no sign of recovery.

Heretofore almost 90% of Japanese considered themselves members of the middle class. This class had not yet disappeared, but there were signs it was dwindling. In half a decade (1995–2000), income disparities grew by almost 50%. With the fastest-aging population in the world, Japan faced the dilemma of a shrinking workforce to support the growing sector of retired persons. Most obvious, in 10 years the unemployment rate had climbed to a record 5.5%. At the other extreme were a relatively small number of wealthy Japanese, who had spawned a building boom for luxury apartments in the big cities. Gerald Curtis of Columbia University, New York City, noted the “strong trend of emerging class differences” in Japan.

The nation’s central bank had long provided a useful instrument for surveying the economy—a quarterly report (tankan) on the state of business. On February 8 the Bank of Japan stated that the economy was “broadly worsening” and left monetary policy unchanged. It kept ¥15 trillion ($114 billion) available for money markets. By the end of the month, the bank had promised to buy ¥1 trillion ($7.6 billion) in government bonds every month.

On March 30 two of the largest banks (UFJ Holdings and Bank of Tokyo–Mitsubishi) stated that they would slash interest rates to 0.001%. Many Japanese began to hoard gold rather than use savings accounts; the first quarter saw sales of gold nearly quadruple from the same period the previous year. The tankan released on July 16 claimed that the economy was “bottoming out” and moving to firmer ground. Exports and corporate profits continued to expand, but capital and consumer spending (representing 70% of the economy) remained weak. By September the Nikkei index had fallen for seven consecutive sessions, giving up more than 8% of its value. Banks were especially vulnerable to the slide, since they held large portfolios and depended on stocks for much of their capital. The bank’s tankan of September indicated that the economy could soon slip back into recession.

In 2001 the merchandise trade surplus had reached an 18-year low (38% below the 2000 level), with the U.S. recession cutting imports of electronic and high-tech equipment from Japan. The surplus expanded slightly in January 2002 but again fell off about 11% in February. For the first time, Japan would be earning more from investments overseas than from trade. The population was shifting from producers to coupon clippers. Meanwhile, China was on the verge of displacing Japan as the biggest exporter to the U.S. In April Japan’s trade surplus grew by over 26.6% to ¥837 billion ($6.7 billion). The surplus with the U.S., however, slipped 3.5% because of Washington’s trade action on imports of steel. In June the current account surplus nearly doubled (from June 2001). Exports increased (over 8%), but imports tailed off (-4.6%) because of the weak domestic economy. For a fifth straight month, the surplus grew (8.9%) in July. In September, however, export growth slowed and the surplus grew by only 1.1%.

In many different ways Japan’s production of automobiles had become an essential element in the economy. Honda, for example, recorded robust sales and profits in the last quarter of 2001 and the first quarter of 2002. The company enjoyed wide circulation of low-priced models at home and in the U.S. It passed Nissan in volume of sales to become the nation’s second leading automaker, behind Toyota.

In record sales, operations profit, and net income, Toyota strengthened its position as leader by commanding a 43% market share in Japan. The company, the world’s third largest producer of autos, earned about $2.9 billion in the April–June quarter. Meanwhile, in April Toyota’s production overseas increased by 37%.

Aside from the Bank of Japan, the nation’s private banks and investment firms had also played a vital role in the economy. In March, however, Merrill Lynch and Morgan Stanley Dean Witter moved to abandon all retail finance in Japan. In August deflation led the government to consider savings interest rates below zero. These would be, however, guaranteed settlement accounts. On September 30 the prime minister, declaring an “emergency,” appointed a 51-year-old academic, Heizo Takenaka, to be an “economic czar.” Takenaka moved swiftly to try to solve the banks’ bad-loan problems but encountered stiff resistance from bankers, cabinet members, and even conservative critics in the LDP. Eventually he backed down, allowing an 11-member task force to design modest reforms.

Foreign Affairs

Early in the year Japan was prominently represented in two important conferences. After a tour of five Southeast Asian nations, on January 14 Prime Minister Koizumi made a major address at a meeting in Singapore, held to promote the expansion of the Association of Southeast Asian Nations to countries such as Japan, South Korea, Australia, and New Zealand. He proposed a broad East Asian economic bloc. At the time, however, he was hampered by a falling yen, which meant a loss of competitiveness for Japan’s neighbours. Earlier he had assured Asian leaders, “Japan will never again walk the path of a military power.”

A week later Tokyo hosted a gathering of delegates from more than 50 nations to discuss the rebuilding of Afghanistan. The prime minister pledged $250 million for the first year and a like amount to be paid later.

On February 17 U.S. Pres. George W. Bush began a delayed trip to Japan and South Korea. In Tokyo he faced the dilemma of discussing the gravity of Japan’s deflationary crisis without appearing to exert unwelcome pressure on Japan. On the eve of the visit, to show that he was indeed in charge, Koizumi ordered increased inspections of the troubled banks.

Bush addressed the (upper) House of Councillors on February 19, turning to shared problems of foreign relations. He praised Japan for its indirect support of American actions in Afghanistan. He denounced North Korea as a member of an “axis of evil” and pledged support to South Korea (ignoring Tokyo’s support of Seoul’s effort to normalize relations with the North). After the speech, with wife Laura Bush, the president had lunch with Emperor Akihito and Empress Michiko.

During the year Tokyo and Washington faced policy problems with regard to whaling. On February 22 Japan notified the International Whaling Commission (IWC) that it planned to double its catch for the purpose of “scientific research.” American officials charged that Japan was actually engaging in commercial whaling, as the whale meat it used for “research” ultimately was sold for human consumption. In May the commission met in Shimonoseki, Japan’s whaling port, and forbad Japan’s return to commercial whaling. Tokyo tried several maneuvers, but in November, in a meeting in Chile, delegates to a convention on endangered species limited trade in products from minke and Bryde’s whales, favoured by the Japanese.

In January 2001 an American air force sergeant stationed in Okinawa had been charged with the rape of a local woman. He claimed the encounter was consensual, and the U.S. military hesitated for days before handing him over to the local court. An immediate Japanese reaction included demands for the reduction of American forces on the island. (Some 47,000 military personnel were based on Okinawa.) In March 2002 a district court in Naha sentenced the airman to 32 months in jail. The protest continued, however, and some officials called for a renegotiation of the status of forces agreement governing the U.S. military presence in Japan.

Another issue inherited from the previous year was resolved in Japan’s favour. In February 2001 an American nuclear submarine in a surface drill off Hawaii had collided with a Japanese fishing trawler, the Ehime-maru. In March 2002 the U.S. Navy pledged $10 million to the vessel’s home port.

Relations between Japan and the two regimes on the peninsula of Korea remained strained because of history. Indeed, attempts to normalize relations with North Korea were stalled over Pyongyang’s insistence that Tokyo publicly apologize and compensate for Japan’s wartime record. Equally disruptive was Tokyo’s demand that the North account for, and return, 11 Japanese citizens abducted in the 1970s. In December 2001 a vessel disguised as a fishing boat (and later determined to have come from North Korea) exchanged fire with the Japanese Coast Guard. The vessel fled and sank in waters in the Chinese economic zone. In April 2002 the New China News Agency announced that after some delay Beijing had given Japan permission to recover the ship. Japanese crews salvaged the vessel in September. The incident marked a low point in the relations between Pyongyang and Tokyo. The possibility of a breakthrough, however, came on September 17 when Koizumi became the first Japanese prime minister to visit Pyongyang. He won an accounting for the kidnapped Japanese (eight had died) and an agreement to continue dialogue toward normal relations. For their part the North Koreans received a public apology for Japan’s colonial record and assurance that they would receive monetary aid. At first praised for the visit to Pyongyang, Koizumi encountered increasing criticism as more details about the abductees emerged. Moreover when, in October, the North Koreans confessed to an American official that they were, in violation of agreements, involved in work on nuclear weapons, the Japanese announced that normalization was on hold. Indeed, on October 23 at a meeting in Mexico, Japan joined the U.S. and South Korea in a warning to Pyongyang.

The year 2002 witnessed an unusual cooperation between Japan and South Korea; the two countries served as the first cohosts of the World Cup association football (soccer) tournament—the world’s biggest sporting event. On March 22 Koizumi visited Seoul to promote goodwill before the competition. It was the first time that the World Cup had been held in Asia. (SeeSports and Games:Football:Sidebar.)

As to its largest neighbour to the west, Japan had expressed support for the American statement of policy: there was but one China, but Taiwan must not be integrated by force. With Beijing, however, a different and sensitive issue emerged. In 2001 Koizumi had become the first prime minister in five years to go to the Yasukuni Shrine in Tokyo, the site dedicated to more than two million military personnel lost since the 1850s. On April 21, 2002 (carefully avoiding the August anniversary of Japan’s surrender in 1945), he made a surprise, “private” visit to the sanctuary. Known for his nationalist leanings, Japan’s leader sparked regional outrage over the visit. Beijing immediately summoned Japan’s ambassador to China to denounce “the erroneous action that damages ties” between the two nations. China’s Foreign Ministry in a statement expressed vehement disapproval of the visit to the Yasukuni Shrine, “which honors Class A war criminals” and “is a symbol of militarism.” In South Korea members of the governing and opposition parties jointly condemned the Japanese prime minister. The issue was further expanded by Tokyo’s refusal to revise strongly nationalistic school textbooks.

On May 8 a slightly less-inflammatory incident further disturbed relations between Tokyo and Beijing. In Japan, Koizumi met with China’s Ambassador Wu Dawei to inform him that he believed China had violated the Vienna Convention governing diplomatic relations. Videotape aired on television clearly showed how Chinese police had seized five North Korean refugees from Japan’s consulate in Shenyang. After lengthy ministerial negotiations, the refugees were released via South Korea.

Contacts between Tokyo and Moscow were struck on what appeared to be a minor territorial issue. Since 1945 the Russians had occupied several tiny islands between Japan’s Hokkaido and Russia’s Kuril Islands. Failure to recover the islets—Tokyo referred to them as the “Northern Territories,” historically Japanese—blocked negotiations toward a final peace treaty to end World War II. Ministers representing the two nations met informally at international conferences and had often promised to settle the dispute, but it dragged on through 2002.